Good morning. My name is Adam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the ACI Worldwide Reports Third Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to John Kraft, Vice President of Investor Relations. Mr. Kraft, you may begin.

John Kraft

Thanks, Adam, and good morning, everybody. Today's call, like all of our events, is subject to both Safe Harbor and forward-looking statements. You can find the full text of both statements on the first and final pages of our presentation deck today, a copy of which is available on our website, as well as with the SEC.

On this morning's call is Phil Heasley, our CEO; and Scott Behrens, our CFO. But before we start, I did want to remind you that ACI will be hosting our 2013 Investor Day next Thursday, November 14, in Naples, Florida. We look forward to seeing many of you there.

With that, I'd like to turn the call over to Phil Heasley. Phil?

Philip G. Heasley

Yes, thank you, John. Good morning, and thank you for joining our call. I'm happy to share with you that ACI had a busy and productive quarter. We completed the acquisition of Official Payments earlier this week. The transaction will further extend our leadership in the fast-growing EBPP space, expanding our portfolio across key verticals, including federal, state and local governments, municipal utilities, higher education institutions and charitable giving organizations.

Official Payments has a strong brand, loyal user base, vertical expertise and a talented organization that makes them an ideal match for ACI. In August, we completed an oversubscribed $300 million bond offering. We're able to capitalize on the historically low interest rate environment and now have more financial flexibility and an improved capital structure.

Turning to the quarterly operating results. Quarter 3 was solid and in line with our expectations. Our revenues increased 35% in the quarter and up 11% organically. Sales, net of term in the quarter grew 17% and we are tracking to our full year plan.

Our sales booking pipeline is at record levels, with strength across all regions. We have had notable success with our new Universal Payments strategy and expect a strong fourth quarter. As the industry's only end-to-end highly differentiated payment solution, the market's interest in our offering is extremely high from both existing customers, as well as with new prospects.

Our adjusted EBITDA margin expanded 8 percentage points in the quarter to 29%. This strong performance was driven by high quality recurring revenue, operational effectiveness and ORCC core synergy attainment. In quarter 3, we also repurchased 1.3 million or $65 million of our outstanding shares, bringing our total repurchase, year-to-date, to roughly 1.7 million shares or $81 million. Currently, we have about $108 million remaining in our share repurchase authorization.

Regarding our outlook for the remainder of the year, we're raising our guidance to account for the acquisition of Official Payments.

Lastly, we hope to see you next week in Naples Florida at our Investor Day. We're looking forward to introducing you to our executive team, as well as to provide additional detail regarding our strategic plans and our growth opportunities.

I will now hand the call over to Scott to discuss our financial results and updated guidance in further detail. Thank you.

Scott W. Behrens

Thanks, Phil, and good morning, everyone. I first plan to go through the highlights of the third quarter, and then provide an update on our outlook for the full year 2013. And we'll then open the line for questions.

I'll be starting my comments on Slide 6 with key takeaways from the quarter. We have closed the Official -- we closed the Official Payments transaction earlier this week. The acquisition should add $18 million to $20 million to our full year revenue. That being for the period November 5 through December 31, so about a 7-week period.

We expect to achieve roughly $8 million in annualized cost synergies by the end of this year, which brings the net multiple we paid for the company to roughly 6.5x 2013 adjusted EBITDA.

New sales bookings were $148 million in the quarter, up 17% on a consolidated basis. As Phil mentioned, we remain very optimistic regarding our pipeline for the last 2 months of the year and we continue to expect our organic new sales bookings growth to be in the mid-teens for the full year 2013.

Turning to backlog. Our 12-month backlog decreased $6 million or $11 million after adjusting for foreign currency fluctuations to $740 million, while our 60-month backlog increased $28 million or $8 million after adjusting for foreign currency fluctuations, that coming to $3.1 billion.

We saw strong revenue growth over Q3 2012 with our non-GAAP revenue increasing 11% organically or 35% when including a $37 million contribution from Online Resources. And notably, our software hosting fees more than doubled to $68 million in the quarter and again, this is essentially the recurring subscription- and transaction-based fee revenue.

In addition to the ORCC contribution, recurring revenue grew 9% organically, and now represents 71% of our consolidated total revenue.

We also saw solid growth in operating free cash flow, which came in at $27 million for the quarter, up nicely from last year's negative $1 million. And year-to-date, we have generated $83 million of free cash flow, up from essentially 0 this time last year.

Turning next to Slide 7. Our operating expense increased $33 million from last year's Q3, primarily from the inclusion of Online Resources, while organic operating expenses were essentially flat with last year.

And lastly here, we incurred roughly $9 million of transaction- and integration-related cost during the quarter, representing primarily severance, site closure costs and third-party professional fees.

Non-GAAP operating income in Q3 more than doubled to $40 million from $18 million last year, while adjusted EBITDA of $62 million was up 85% from $34 million last year. And EBITDA margin was 29% in the quarter, up from 22 -- 21% in Q3 last year.

Moving next to debt and liquidity. We ended the quarter with $167 million in cash. During the quarter, we completed an oversubscribed $300 million bond offering, which is providing us with additional financial flexibility. We used $188 million of the proceeds to pay off our revolving credit facility.

Our overall debt level at the end of the quarter was $764 million. In Q3, as Phil mentioned, we increased our buyback activity and as of today, we have repurchased approximately 1.7 million shares for roughly $81 million year-to-date, this representing roughly 4% of our outstanding share count.

And lastly, let me discuss our outlook for 2013 on Slide 8, which we're adjusting for the acquisition of Official Payments. As I've previously stated, we assume the transaction will add $18 million to $20 million in revenue, which increases our expected 2013 revenue to be between $883 million and $905 million. We expect minimal non-GAAP operating income and are not changing our $165 million to $175 million range.

Official Payments should add roughly $1 million in adjusted EBITDA for the 7 weeks, which increases our expectations to a range of $257 million to $267 million for the full year. And as of today, we're currently tracking to the low-end of these combined ranges.

Again, this guidance excludes acquisition and integration-related expenses that we're expecting to be approximately $27 million, and roughly $6 million in deferred revenue haircut. This revenue represents organic growth in the low- to mid-single digits.

We continue to expect depreciation and amortization to be approximately $70 million to $75 million, and also expect roughly $16 million of noncash, stock-based compensation.

And lastly, here, we do expect to finish the year strong with full year organic new sales bookings increasing in the mid-teens as a percentage over last year. So overall, we had a strong quarter with solid growth in revenue, margins and cash flow over last year and are expecting to finish the year strong.

That concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Sutton from Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

I'm wondering if you could give us just some more comfort around your -- or your comfort relative to the organic bookings number in Q4. So obviously, you've got, as you had said, a very large pipeline to work from. Is that dependent on anything particularly large to achieve your expectations? And then I'll have a follow-up.

Philip G. Heasley

George, no -- you mean, is it dependent on any particular big, huge deal or whatever, no. It's not. I mean there's a lot of deals coming through. This is the end of the -- this is our Christmas shopping season but no, there's no one -- there's no elephant in the room.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Now Phil, you mentioned that UPP, that would be part of the reason for the strength in Q4. And I'm just curious if you can give us a thought process around how the banks are responding to that part of your offering relative to you becoming broader as a vendor to them.

Philip G. Heasley

I think what UPP has done is it's really -- it's delivered on the promise that we are firmly committed to solutions in the payment area and enabling our customer bases to embrace the opportunities that are coming from change and whether the change is needing to be more productive or the change has to do with the ubiquity and strength of online commerce and whatnot. So I think that's where it's coming from. And we're beginning -- I think the easiest way for us to describe the change is that our conversations are becoming much more business and C-level. And of course, we're not ignoring the technology and operations levels, but the focus on the win-wins are moving their way up the organization. And it makes sort of a more complex sale because it's a more inclusive sale, but I think that's the best way to -- then I think on the ORCC side, I think that it was -- it somewhat answers the different aspect of your question, is that we're doing fantastically. If you were to look at the ORCC as though it was an independent company, the last 2 quarters, we'd be up 22% or 55% from a SNET basis. And that's coming from the strength of the ACI relationships, it's not coming from stuff that's outside that circle. And as they see -- and I think the analysts, the industry analysts are in agreement with what we're trying to do pretty strongly. And so we're beginning to get validation of that back from people that write checks in our company. In one particular case, which is not a third quarter result and may not be a fourth quarter result, we're actually getting contacted by some of our good customers saying, "Do you think you can do this for us here?" Right. So I think we're taking on the role that we've been working for a lot of years now, George, to take on and validate with our customers.

Operator

Your next question comes from the line of Wayne Johnson from Raymond James.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Can you guys give a little bit of color on what the top line performance has been for S1 and Online Resources? How has that unfolded? S1 you, obviously, had in the portfolio for over a year, ORCC is newer. But it just seems like the top line seems to be laboring here. And so I was wondering if you could give any color on those topics? And I have a follow-up.

Scott W. Behrens

Well, I'll just say 2 things from an -- starting with ORCC. You can see what that contribution has been on the year. We're tracking consistently with what we said in our February call in terms of what the ORCC contribution would be for the year, roughly tracking to the $162 million to $163 million. So it's tracking to what we told you earlier in the year. From an S1 perspective, the one thing we can't do, from the date that we acquired S1 going forward, the further you get from that date, it's harder to discern what is S1 and what's ACI because we make product decisions to stop selling certain products on both sides related to that. So where we're seeing a significant amount of success in the S1 side is on the online banking, which was one of the rationales for the purchase was selling online banking, especially overseas, where we didn't have a product before. So from an overall contribution, again, it's more difficult to see as you get further away from the acquisition date.

Philip G. Heasley

Yes, let me answer it another way, too. We clearly, the combination of the 2 onlines are clearly creating this opportunity, which was the main reason we bought S1. And we're very happy with that. That's one point. Point number two is that we don't sell perpetual licenses, we sell subscription. So every quarter, I'm going to tell you that on an apples-to-apples basis, what they called revenue and what we called revenue is not the same thing. But it's the backlog-to-backlog basis that is the relevant -- maybe we're nuts not to take our revenue all up front, but we're in this for the long haul. The other one that I would think would be extremely obvious to everybody is that we're 5x or 6x their size on the payments side and their only growth was coming from our attrition rates sitting at 3% or 4%. And now our attrition rates are sitting at 3%. So if our attrition rate -- if we have improved 1% in attrition and we were 5x their size, that meant that what was 5% to their growth is sitting in less attrition on our side. Quite honestly, guys, you can beat me up forever on keeping good business and not having to resell it, right, than to say well, where is the apples-to-apples? So it's not perpetual, right? I'd rather have it in reduced attrition than going out and reselling what we have there and whatnot. And it's been very -- S1, it's never easy to put something that size and that global together and whatnot. Our guys have worked really, really hard and that has also been really, really good. If you think of it in its totality, not just one line achieved, it's coming into backlog, that means the revenue is going to come. Gee, if it's coming from reduced attrition instead of them, rather, disintermediating ourselves, we feel pretty good about that, too.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay, great. I appreciate that. So good color on quality of revenues here. And just to take that one step further, the organic revenue growth, kind of low- to mid-single digits, as we're now in November and we're looking into next year and I know that I'm going to see you guys next week and everyone is going to hear about what you have to say at that time. But just to give kind of a broad range, low- to mid-single digits, how should we -- in revenue growth for this year, how should we think about next year?

Scott W. Behrens

Well, I think, generally, we have told you that we will be consistent that our revenue growth outlook over time is mid- to high single-digit. The one thing we have to make sure we do and we're going to do it here next week is kind of establish what does 2013 look like? What's the baseline? What's the exit rate going into next year? And that is -- we didn't have ORCC in there for the full year. We obviously don't have Official Payments in the full year. So we're going to kind of walk that and build up what our baseline is for '13. But I would say, our growth projections, over time, are in the mid- to high-single digits on the top line.

Operator

Your next question comes from the line of Brett Huff from Stephens Inc.

Brett Huff - Stephens Inc., Research Division

Two questions, both on bookings. One is, on the bookings that we think are going to come in the 4Q, can you give us a sense of, qualitatively or quantitatively, how those bookings will turn into revenue over time? Are they faster to turn into revenues, slower to turn into revenue? Can you give us sort of a sense? Because that high-teens or mid-teens bookings is a compelling number, but I'm just trying to figure out when that rolls in and we see it in the P&L.

Scott W. Behrens

Well, I mean, I'd say I don't think the Q4 sales are any different than our historical mix. There will be, obviously, a low conversion in the fourth quarter. We don't bank on a whole lot of sales to revenue conversion in any given quarter. We go in with 90-plus percent already in backlog. So the conversion to revenue from new sales will be consistent with the past. And obviously, the larger, the more complex deals that we do, multiproduct, now with Universal Payments, it's going to be -- it could deliver in a couple of years. But nothing real big that would -- can have to contribute to revenue this year.

Philip G. Heasley

It's a great question, though, because we're getting a lot of opportunity, and UPP is driving a lot. And UPP is not reducing the implementation cycle, right, because we're selling more complexity and whatnot. And the other change, Brett, that's taking place -- and that's why I think it's a good question, is we are doing a lot more SaaS business, Software-as-a-Service business, than we're doing on-site business. So a lot of the growth in sales are going to -- will end up being installed in our own center, and whereas -- that's going to give us, once installed, a better revenue stream. That actually, in the beginning launch from sale -- you start month of booking to actual revenue earnings, is actually a little -- it's actually a little slower because you don't have your percent completion and whatnot. You got to get them up and running and then, once it's up and running, we'll end up getting it on a pro rata. So it's better revenue and we'll probably be at the same run rate at the same time, or even maybe a little better run rate at the same time. But the curve will be a little bit slower, it'll actually be a little bit slower coming up. And that's -- so the good news is the amount that's being sold, if there's a short-term offset is that a lot of that is going to become SaaS, very sticky SaaS volume, which will end up booking itself into revenue a little bit slower. Did -- was I -- did I make that totally confusing?

Brett Huff - Stephens Inc., Research Division

No, that makes sense. Let me, and my -- you kind of addressed my second question, which is specifically on UPP. I think, Philip, it was either the last quarter or the quarter before, that you talked about UPP having potentially very large deals, maybe deals all-in contract value that are bigger than even the large BASE24 deals. Assuming sort of an equivalent large deal BASE24 to UPP, can you compare and contrast kind of how that curve looks like, is it a 2-year implementation, a 5-year implementation? Just -- UPP seems like you're hooking together so many different disparate systems that it could be extremely long?

Philip G. Heasley

I don't think it's going to be extremely long. I think -- one thing we've been working really hard on is being better at implementations, right? And this may -- and so I think the improvements in our implementation are going to be somewhat consumed by the breadth of these implementations. So I think there is a fairness to that, but we're not looking for that to push itself out. Even in these very large UPP deals, these UPP deals, we are seeing more and more interest in us probably initially hosting the solution you know, to build, operate and transfer or to build, operate, rate and maintain it. I think some of these deals will end up being very large. And you can't really compare them to the retail deals because I think a lot of the big UPP deals will be retail. And they'll be the means in which people go from plastic to eps with cohabitation and whatnot. And so by definition, I think they'll be larger because I think it will become the bridging activity -- we all know about hubbing and the value of hubbing and whatnot, but bridging technology -- and this orchestration brings an ability to bridge the old and the new in a way that a lot of people haven't been thinking about. The analysts are doing a good job of laying it out, the industry analysts. But no, I do think they'll end up being large. I think they'll be large multi-phased deals, which means that these -- and that will be much bigger, but they'll end up having 2 or 3 or 4 completions to them because they're taking up more breadth within our -- in our customer. Or to think of it differently, where they're collapsing multiple pieces into a more singular payment infrastructure is probably the better way of thinking about it so that you'd be bring it in by pieces, not building it out in pieces, I think it's probably the better way to explain it.

Operator

[Operator Instructions] Your next question comes from the line of Thomas McCrohan from Janney.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

What contributed to the sequential decline -- and looking on a GAAP basis, sequential decline in R&D and SG&A? It's -- in my -- by my calculations, it's almost like a $10 million sequential decline.

Scott W. Behrens

Yes, I think -- you're looking at it just quarter-over-quarter?

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Yes, Q2 to Q3.

Scott W. Behrens

Yes, I wouldn't look at it quarter-over-quarter. I'd look at it on a trailing basis. I mean, our investments in both R&D and selling and marketing are tracking pretty consistent with what we've had in the past. But you'd have to look at it more -- it's more timing in the year.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

So as a percentage of revenue this quarter, is that kind of the way to be thinking about R&D going into next year?

Scott W. Behrens

No, I wouldn't -- I mean, the R&D and the selling and marketing dollars are generally pretty consistent. They'll grow. I mean, we will invest more next year in both of those but obviously, as we get revenue growth, we'll get leverage on that. So I wouldn't -- over time, I would see the percentage spent on R&D decline. But it will be -- we'll still be investing more dollars every year, just as a smaller percentage of revenue growth.

Philip G. Heasley

But we'll be significantly over industry average in R&D investments for the next 5 years and whatnot.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Maybe just squeeze in one more, and if I missed it I apologize. Did you folks disclose the potential synergies from Official Payments? For synergies?

Scott W. Behrens

Yes, we expect to achieve $8 million of cost takeout by December 31 of this year.

Operator

There are no further questions at this time. I'll turn the call back to the presenters.

John Kraft

Great, thanks, everybody, for joining us. And we'll see some of you next week.

Operator

This concludes today's conference call. You may now disconnect.

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